Published twice yearly, the Global Financial Stability Report (GFSR) was created to provide a more frequent assessment of global financial markets by the IMF and to address emerging market financing in a global context. It provides timely analysis of developments in both mature and emerging market countries and seeks to identify potential fault lines in the global financial system that could lead to crisis. The GFSR aims to deepen its readers' understanding of global capital flows, which play a critical role as an engine of world economic growth. Of key value, the report focuses on current conditions in global financial markets, highlighting issues of financial imbalances, and of a structural nature, that could pose risks to financial market stability and sustained market access by emerging market borrowers.

This chapter assesses how market risk management techniques may have contributed to the benign financial environment of recent years, and whether seemingly prudent behavior by individual firms, reacting to similar market risk systems, could serve to amplify market volatility in periods of stress beyond what would otherwise have occurred. Based on simulations and observed risk management practice, there are grounds for believing that this could be the case. Results of the simulations suggest that, in a period of stress, having a variety of risk models is more stabilizing than uniformity. Perhaps more important, however, is the presence of a variety of types of financial institutions with differing investment horizons and risk appetites, as well as the scope to take offsetting positions when prices overshoot and “fire sales” occur.

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